Bharat Electronics : HOLD

Strong Q4, But Upside Capped  

Bharat Electronics’ (BEL) 4QFY11 PAT of Rs 4.5 bn (69% YoY rise), came well above our expectations of Rs 3.4 bn. Driven by strong revenue growth of 23% YoY (v/s expectation of 10% YoY), mgmt indicated that qtly seasonality in terms of delivery has helped numbers. Margins saw ~550 bps YoY rise to 24.6% (v/s expected 22.5%), backed by strong revenue growth. Despite strong order book of Rs 236 bn, mgmt expects revenue growth to remain tepid at ~13-14% to Rs 62 bn. This is reflective of longer gestation projects in the order book. We believe BEL’s margins will be under pressure, as its order book mix is changing to more turnkey nature projects v/s niche engineering.  While we have raised our FY12E-13E EPS ests by 2-5% to account for the robust 4Q FY11 numbers, we believe upside remains capped from current levels. We have a HOLD rating with a TP of Rs 1,650, valued at 15x PE FY12E. 

Key highlights

• Muted sales target for FY12E despite robust order book: BEL’s order book has doubled YoY to Rs 236 bn v/s Rs 114 bn in 4Q FY10. However, mgmt has guided for only ~13-14% revenue growth for FY12E, given longer gestation nature of projects.
• Margins to remain a dampener: While BEL’s margin for the qtr has been higher than expected, margins are likely to remain weak at 14-16% levels going forward. This reflects execution mix change to projects on a turnkey basis implying lower margins v/s higher niche engg. Project margins of 20%+levels for earlier years.

Valuation

We believe margin pressure will cap profitability upside from revenue growth, despite robust order book of ~Rs 236 bn. Accordingly, we have raised our FY12E–13E EPS estimates only by  2-5% to account for the robust 4Q FY11 numbers. We have a HOLD rating  on  the  stock  with  a TP  of  Rs  1,650,valued at 15x PE FY12E.